86. While James Craig and his former classmate Paul Dolittle both studied accounting at school,…

86. While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decoration. Their company, Good to Eat (GTE), specializes in custo-sculpted cakes for weddings, birthday’s, and other celebrations. James and Paul formed the business at the beginning of 2019, and each contributed $50,000 in exchange for a 50% ownership interest. GTE also borrowed $200,000 from a local bank. Both James and Paul had to personally guarantee the loan. Bothe owners provide significant services for the business. The following information pertains to GTE’s 2019 activities

· GTE uses cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.

· GTE received $450,000 of ssales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).

· GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).

· GTE paid $15,000 of rent for a building and equipment, $20,000 for advetising, $14,000 in interest expenses, $4,000 for utilities, and $20,000 for supplies.

· GTE contributed $5,000 to charaty.

· GTE received a $1,000 qualified dividend form a great stock investment (it owned 2 percent of the corporation distributing the dividend), and it recognized $1,500 in short-term capital gain when it sold some of the stock.

· On December 1,2019, GTE distributed $20,000 to James and $20,000 to Paul.

· GTE has qualified property of $300,000 (unadjusted basis).

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